HONG KONG: China’s plan to tighten scrutiny over mainland companies’ overseas share sales is likely to ease the regulatory uncertainty that roiled financial markets this year and stalled offshore listings, according to bankers and analysts.

       But the securities regulator’s new filing-based system, designed to rein in once freewheeling Chinese listings in the US market and elsewhere, leaves open questions about rule enforcement and compliance criteria, according to them.

       “The new rules represent a comprehensive, systemic and market-oriented regulatory upgrade,” investment bank China International Capital Corp (CICC) said in a note, but added they contain “some items that need further observation, and clarification.”

       The China Securities and Regulatory Commission published draft rules last Friday requiring filings by companies seeking offshore listings under a framework to ensure they comply with Chinese laws and regulations.

       Companies using a so-called variable interest entity (VIE) structure will still be allowed to seek offshore listings as long as they are compliant, removing uncertainty for investors who feared China would block such listings. That risk loomed large after Didi Global Inc’s US listing in July sparked a major regulatory backlash from Chinese officials, who were concerned over national security.

       The VIE structure has been used by most overseas-listed Chinese tech companies, such as Alibaba and JD.com, to skirt Chinese restrictions on foreign investment in certain sectors.

       Uncertainty over the future of VIE structures, coupled with China’s regulatory crackdowns in major sectors such as e-commerce and tutoring, has bashed shares in offshore-listed Chinese companies this year.

       And while Chinese firms raised US$12.8bil (RM53.7bil) in the United States this year, the value of deals ground to a halt after Didi’s July listing.

       In Hong Kong, the value of initial public offerings (IPOs) in 2021 fell to US$26.7bil (RM112bil) from the previous year’s US$32.1bil (RM135bil), according to Refinitiv data.

       Reaction to the new rules will be seen today when the US stock market resumes trade after closing last Friday for the Christmas holiday.

       Hong Kong stocks will resume trading tomorrow.

       The planned filing-based system is also expected to ease uncertainty by calling for closer coordination between the securities regulator and various industry regulators, such as the cyberspace watchdog.

       “The issuance of the draft rules shows that major communication obstacles have been removed between different regulatory bodies,” said Ming Jin, managing partner at Chinese boutique investment bank Cygnus Equity.

       But it remains unclear how the rules would be enforced and compliance determined, especially when a VIE structure is used to circumvent foreign investment restrictions, the CICC note said.

       The investment bank added that even if a company plans a Hong Kong listing, which would pose no risk to national security, “we still suggest the issuer voluntarily contact the Cyber Administration of China (CAC) for its nod” before going to the securities regulator.

       The new rules cover all types of offshore share sales, including initial public offerings, secondary listings, backdoor listings, and flotation via Special Purpose Acquisition Companies or SPACs. — Reuters